To Sell or Not to Sell?

Part 1 of this series outlinedsome possible reasons for deciding to sell your business, the concept of fair market value and some factors that will influence the potential value of your company in a sale. To maximize value, you should concentrate on future economic benefits such as profit, cash flow, dividends and other forms of potential return on investment, not on company history. Audited financial statements and a professional, current business valuation support these projections.

The business environment also influences the price you will get. A “best price” environment exists when the economy is growing, your market or industry is expanding and company sales and profits are increasing. Accordingly, your future prospects are positive, and the overall risk to prospective buyers appears low.

The sales process includes several steps. First, a marketing plan is prepared. Showing your business is similar to showing your home. You tidy up the details so that it looks its best in appearance and on paper. Employees may be scrutinized, your reputation checked and your contracts reviewed.

Since you may have reduced profits to extract higher rewards for yourself, your financial statements most likely will be recast to show how the business would operate without the impact of your salary or any extra perks you have received from the business. A marketing prospectus will be created, including everything from photographs and history to price and terms of sale, financial information, contracts, a client list, brochures and future plans.

Then, qualified buyers will be located. Potential buyers may be suppliers, customers, employees, individual or group investors, larger companies, industry consolidators or even competitors. Each category of potential buyer carries its own baggage. Most competitors and suppliers are “tire kickers” and may be seeking exposure of proprietary information. Employees may expect concessions, such as a below-market price and may have more limited resources to fund the purchase.

Individual investors pay for past performance and often are less concerned with future growth, while investor groups want profitable companies with more than $10 million in sales. A larger company has the resources to pay a premium price as an entry to a market niche, while consolidators look for fragmented industries with many high-profit “mom and pop” operations. The intermediary earns his or her fee by weeding out the unqualified or uncommitted buyers and negotiating the best possible deal for you.

When you have a serious buyer, always insist on a confidentiality agreement before releasing proprietary information. Putting the intermediary in charge prevents your emotions from impeding the negotiations. Establish the price, and be flexible with the terms. Do you want cash, stock or an asset exchange? Are you willing to finance the deal, and if so, on what terms? Remember that you control the timing of the negotiations. You sign a letter of intent or letter of understanding, the buyer puts the deposit in escrow, and you begin the due diligence process to reveal any outstanding issues to be settled.

Naturally, your interests will differ from those of the buyer. You worry whether you are getting a fair price, whether you will be paid on time or whether the buyer actually has the money to close the deal. You may be concerned with how much the Internal Revenue Service will claim for taxes on the sale, or whether the buyer will ruin the company.

Meanwhile, the buyer may be worrying about whether he or she can really afford the purchase, where the financing will come from, whether the price is too high or whether the business is what it appears to be. The buyer also may have doubts about his or her ability to keep the business operating profitably.

The most common mistakes made by sellers involve inadequate preparation or poor market timing, failing to identify and negotiate with the right buyer, and the inability to understand the buyer’s perspective. If the deal is poorly structured or you are unable to defend your price, you won’t obtain full value. A professional intermediary should be able to prevent many of these common mistakes.

The planned transition should be kept secret until the deal actually closes. Otherwise, competitors may pirate customers, or the customers may leave by choice. Key employees may find other jobs, and suppliers or lenders may revise credit terms or withdraw credit completely. Rumors and speculation can negatively affect all of these relationships and, ultimately, obstruct the closing of the deal.

At the closing, you transfer the assets, collect the money and prepare to go to work for the buyer (if your deal includes an employment contract). If you are making a clean break, you move on to another business opportunity or begin retirement. Completing a successful sale is a major accomplishment. It combines the best method of transferring equity, ensures your financial security, leaves the business able to operate, and minimizes tax or estate consequences. And you have accomplished the first goal of any entrepreneur: to realize the value of what he or she has achieved. EC

NORBERG-JOHNSON is a former subcontractor and past president of two national construction associations. She may be reached at bigpeng@sbcglobal.net.